Saturday, April 23, 2016

The Ideal ETF Portfolio


Here is what I would consider an ideal portfolio:

12.5% SPY - Large Cap
12.5% EFA - International Value
12.5% EEM - International Growth
6.25% IWM - Small Cap
6.25% QQQ - Technology

25% USD - US Dollars
6.25% AGG - US Bonds
6.25% EMB - International High Yield
6.25% BNDX - International Bonds
6.25% HYG - High Yield

This is only what I would consider a theoretical target for a retirement aged investor under normal circumstances but as everybody knows the market frequently operates under conditions that may be described as anything but normal.  I also suffer from the same mistakes that many investors suffer from such as reacting on emotion or bad analysis.  As time passes however, I intend to learn from my mistakes and aim to rebalance my own real portfolio in this direction but only ever plan to reach perfect balance as often as a tight rope walker does at the circus.  

Why not just rebalance immediately after getting out of balance?

I think that it is important to give investments room to breathe which means not always changing them in the way you would rip off a bandage.  Whether an investment is working out well or going badly it is important to recognize that the timing of profits are anything but predictable and the more time that you give to an investment the greater chance that it has to grow properly.  Instead of being quick to cut investments that are not working consider investing in smaller portions over longer periods of time to help reduce bad timing risks.

Why such a large allocation to cash?

Cash is like the king on a chessboard...it has very little functionality on its own but the game cannot be played without it.  In my own experiences I have noticed that the market frequently punishes certain companies and even whole sectors for various reasons only to eventually forget about those reasons over time leading to a recovery.  Keeping cash is like an insurance policy that allows you to take advantage of these special situations when they arise providing a nice risk adjusted return that I think rivals the safest of investments, even treasuries.  Many investors consider an investment falling in price an indicator of increased risk...I tend to think the opposite especially if there is no material change in the fundamental characteristics of the investment itself.

Why such a small allocation to the S&P?

I don't know why so many investors consider the S&P the only game in town.  I've heard plenty of arguments such as the perpetual strength of the US or the multinational orientation of many of its companies but based on what I've learned over the past decade about investing...there is no such thing as tenure or incumbency advantage when it comes to markets.  In the absence of sound information, which is probably 90% of the time, I must weight assets and opportunities equally.  Maintaining a diversified portfolio is just as much about staying power as it is about holding different types of assets.  You need to be able to survive your mistakes in order to learn from them.  This type of thought process has brought me success in the past and I believe will continue to bring me success in the future.  

Is there an ideal portfolio for everybody?

Everything changes and everyone's circumstances are different which could lead to drastic differences in what one would call the ideal portfolio.  Do you have large mortgage or student loan debt or do you work at a place that pays low but has lots of potential?  Diversification doesn't have to stop with your portfolio but can be applied to your whole life as well.  Think about how you can use your unique circumstances to shape and even strengthen your ideal portfolio and you’ll be on your way to discovering who you really are as an investor.  Remember as always, don't over do it, stay diversified and think long term.

Read Next: The BIG Picture

Saturday, April 16, 2016

The BIG Picture

Are we in a stock market bubble?  I think about this question a lot more often nowadays and generally speaking my answer is no.  There are certain things that characterize a bubble for me such as accelerating inflation and interest rates as frenzied borrowers attempt to acquire more money to throw at the bubble.  We actually have the opposite of these two characteristics at the moment which would lead me to believe that we are still in somewhat of a recession. 

To help with maintaining perspective and to avoid overfocusing on near term events I like to keep a long term 60+ year chart of the S&P 500 $SPX handy.  On this chart I also like to plot 7% and 8% annual growth rates because the market has tended to be somewhat constrained by these two rates of growth over the long run.  Looking at the data from this higher level perspective helps to show that the Dot Com Boom was abnormal with the Housing Boom and the subsequent Great Recession within the normal range of long term growth.  Currently we find ourselves smack in the middle of these two rates with the downside limit near 1500 and the upside limit near 2500.  Even though these upper and lower bounds represent normal price movement to me...the majority of the investing public would be ready to declare a depression if the market were to fall 20% or a new era if it were to rise 25%.  This is one of the main benefits in keeping a long term perspective to avoid misinterpreting normal price movement as extreme price movement while relying on too narrow of a focus. 


Furthermore, these bounds would only represent normal price movement but as we all know the market can become abnormal fairly quickly.  With this in mind, I still could not be shocked if the market were to fall all the way to 1000 or rise as far as 4000.  Keeping the BIG picture in mind is so important whether it be prudent investing or anything else in life and to be successful one must practice doing this all of the time.  The more history that you can bring into the picture on not just equity prices but commodity prices as well as interest and exchange rates, the better and more robust your perspective will be.

To recap, with global interest rates and commodity prices near all time lows and the dollar exchange rate and equity prices near all time highs...I just cannot see a bubble at this time.  The absence of a bubble however does not mean that the market cannot still fall substantially so I wouldn't be getting too excited.  Whatever opinion you decide on for yourself remember as always...stay diversified and think long term.

Saturday, April 9, 2016

Is Elon Musk the Steve Jobs of Cars?

I recently purchased additional shares of Tesla $TSLA on 2/9/16 for $142.25 per share [Tweet] and I am shocked and amazed at the more than 75% return that these shares have generated over the past several weeks.  I like Tesla mainly as a growth story but there is something different about this company from other growth companies that I own in my portfolio.

Last Friday during the Model 3 release I saw so many people standing in huge lines all over the country and it reminded me of only one thing...the release of the iPhone.  Never have so many people been so excited about the release of a car and I am starting to think that Musk has discovered something about cars that Jobs had discovered about electronics...what people really want.  When Jobs wanted to put the real internet, not some stripped down version, onto a mobile phone there were many naysayers including the now defunct BlackBerry.  Companies that grow and take market share are companies like Apple that can deliver what people actually want.  I think that Musk and Tesla have stumbled upon this idea as well and are going to start delivering cars that people actually want.

Surprisingly, other auto manufacturers will probably act like BlackBerry did and watch in disbelief as their businesses are taken from them right before their very own eyes.  They will refuse to change their models until it is far too late.  Let's take a look at the potential market share that is up for grabs.


Based on this data, Tesla could double if it can steal as little as 5% of the total outstanding $719B market capitalization of auto manufacturers.  Given the premise that Tesla could push the entire industry to grow and that it could potentially become a strong leader of this newly redesigned industry, 5% could actually be at the lower end of the range.

Musk is similar to Jobs in that they both share a passion for trying different things and fearlessly pushing on boundaries.  It is most likely too early to tell whether or not Musk can use this passion to bring to Telsa the same kind of success that Jobs and Apple have experienced.  That being said, I think Tesla is a great addition to any growth oriented portfolio.  Before getting too excited about the prospects of Tesla you should be aware of the following risks which are surprisingly similar to my favorite ride at Six Flags:

"WARNING: This is a high speed investment that includes sudden and dramatic acceleration, climbing, tilting and dropping.  Failure to follow these guidelines may result in serious loss of capital or bankruptcy.  Investors with the following conditions should not invest: Heart conditions or abnormal blood pressure, back, neck or similar physical conditions, motion sickness or dizziness, recent surgery or other conditions that may be aggravated by this investment."

Remember as always...don't over do it, stay diversified and think long term.

Friday, April 8, 2016

Is Oil at Rock Bottom?

You've probably heard by now the bullish and bearish cases each with compelling arguments in their own rights.  Regardless of the details on storage capacity and dollar strengthening the simple truth about oil's surprisingly low price is that a new technology called "fracking" has been invented and it has pulled more oil out of the earth than anyone could have imagined.  It is nearly impossible to value oil right now due to the disruption that has been caused by this new technology.

Despite all of the issues with the energy sector right now I tend to find myself in the bullish camp based on the simple fact that it has been priced for destruction meaning the risk reward ratio is undoubtedly skewed towards reward.  Here are a few other factors that I am leaning on to help me with this decision:

1. Many world economies are dependent on the energy sector for their GDP meaning that there will be powerful forces working towards a favorable outcome...the energy sector is literally "too big to fail" times a hundred.

2.  People need four things to survive - air, food, water and energy.  Right now the cheapest form of energy available is oil and due to obvious circumstances I do not see a lower priced contender stepping up anytime soon...which tells me that the energy sector will survive and eventually recover at some point in the future.

3.  Value premium is especially ripe in energy at the moment as the perception of risks are through the roof.  Looking at a fifty year time span of oil pricing shows that the commodity has not been priced so favorably in over a decade.  In fact, based on more recent history, it would be a very normal thing if oil were to rise back to $140 over the next several years.


All this being said, it isn't clear which energy companies will survive so I am sticking to energy sector funds in order to avoid specific company bankruptcy risks.  I am also attempting to extract income from selling volatility premium on oil itself.  Whatever you decide regarding the energy sector...don't over do it, stay diversified and think long term.

Read Next: Is Now the Time for an Oil Volatility Linked ETF?

Sunday, April 3, 2016

How I Became a Millionaire in my Thirties

Ten years ago, when I started the process of seriously growing wealth, I never thought in my wildest dreams that I'd be writing an article like this...nevertheless here I am writing it.  What follows are some of the best lessons that I've learned in reaching my goal of becoming a millionaire.

Saving more money is the more important than making more money

This is going to shock you but the single most important contributing factor to obtaining wealth at such an early age is the decision to save and invest 50% of our household income.  You might be screaming...how is it possible to live off of only 50%?!  It isn't easy but I think that it is just as difficult if not more so to live without any significant savings.  We shop at Target $TGT, Walmart $WMT, and Kohl's $KSS.  I mow my own lawn, clean my own modest home and drive old hand-me-down cars from my parents.  My wife and I both work and we jog around the park instead of paying for a gym if we want exercise.  There are countless examples but the main idea among all of them revolves around getting the most bang for your buck.  When you have to spend make sure that you are always getting every bit of value that you can and living off of 50% starts to become possible.

Making a lot of money takes a lot of patience

I think to myself every once in awhile, would I rather have a 10% chance at creating wealth quickly or a 90% chance at creating wealth slowly.  You have to develop the patience to wait for your investments to grow properly and this happens over years and decades not days or even months.  Take the time to read, learn and think about how to properly diversify your assets, position your investments over the longer term and use time to your advantage.  Like they say in real estate, location, location, location...with investing it's patience, patience, patience.

Set money goals that challenge yourself

Believe it or not, if you want to be wealthy you actually have to like investing money more than you like spending it.  One of the ways to train yourself to enjoy the process of growing money is to set realistic money challenges for yourself and then make those challenges more and more difficult over time as you begin reaching them.  For instance, now that I'm a millionaire do I want to go out and blow a bunch of money on a new Lexus?  No, I feel much better creating a new challenge of becoming a multi-millionaire.

Rediscover who you are

The path that I have taken towards financial success is not necessarily going to be the best path for someone else.  It is extremely important to align your method for creating wealth with who you naturally are as a person.  Think back to when you were a child...what types of things or situations did you gravitate towards or shy away from...were you conservative or aggressive?  Chances are that who you were back then is the same person that you are today and if you work with yourself instead of against yourself you'll find it so much easier to achieve the kind success that you've always wanted.

Education is a must

Getting a decent education allows you the opportunity to land a decent paying job that you can work hard at.  Once you have that job it becomes all about how much you can optimize your lifestyle to save and invest as much money as possible.  Balance is the key here...you don't want to over do it and burn out and you don't want to under do it and never reach financial success.  Keep an open mind, be ready to learn from your mistakes and think creatively about how to underspend without feeling overburdened.

The bottom line is that building wealth is all about spending more on things that rise in value and less on things that fall in value.  Dedicate yourself to this process and you’ll be giving yourself an excellent chance at becoming wealthy at some point in the future.

Read Next: Lifestyle